News & Events

news & events / 12.06.24 /Kenneth R. Jacobs

Enforcement of Corporate Transparency Act Temporarily Stopped Nationwide By Federal Court Order

A Texas federal district court has issued a nationwide injunction against the enforcement of the Corporate Transparency Act (“CTA”) by the government. Therefore, until the injunction is lifted, business entities subject to the CTA (including cooperatives and condominiums) do not need to file their beneficial ownership information forms with the Treasury Department. The injunction remains in place until the court issues a final decision on the merits of the case (which could take months or years), or it is reversed by a higher court on appeal.

What You Should Do [Or Not Do] Next

We recommend that entities who were going to file their Beneficial Ownership Information under the CTA should delay the filing until the case proceeds further. This includes cooperatives, condominiums and HOA’s. (However, there is no prohibition against filing if you prefer to do so.)

If the government appeals, the appeal would be heard by the ultra-conservative Fifth Circuit, which is likely to uphold the injunction. The government would then need to appeal to the Supreme Court. We have no idea how the Supreme Court would decide. We also have no idea whether the Justice Department would even continue to seek to enforce the CTA after January 20, 2025, when the new administration is sworn in. In sum, entities subject to the CTA can anticipate a significant delay before they may need to comply with the beneficial ownership filing requirements of the CTA.

What Happened in Court

The plaintiffs in the case included individuals who owned a dairy farm which conducted less than $50,000 of interstate business; a firearms dealer who only did business in Texas; a Tennessee business owner that wanted to protect the name of its beneficial owners; a political advocacy group; and the National Federation of Independent Business, which claims 300,000 members. They asserted that the CTA compels speech that is otherwise protected; constituted an unreasonable seizure of information; and violates the 9^th and 10^th amendments, which reserve certain powers to the states.

In order to obtain a “preliminary injunction”, a plaintiff must show a substantial likelihood of success; irreparable harm; a balancing of the equities in their favor; and no adequate remedy at law. The court determined that the CTA represented an overreaching use of Congress’s rights to regulate interstate commerce, foreign affairs and taxing authority. It also ruled that in order to show “irreparable harm”, the plaintiffs only needed to show that they would incur some harm, but not how much harm they would incur or how expensive compliance might be. Thus the threats of fines and imprisonment, and the need to make a filing, qualified as “harms.” Based on the foregoing, the equities also favored the plaintiffs.

The government claimed that an injunction affecting only the plaintiffs would be the equivalent of a nationwide injunction, since the NFIB had 300,000 members. Ironically, the court stated that it “agreed with the Government”, so it issued a nationwide injunction rather than limiting it to the plaintiffs in the case.

What’s Next

Three different courts have issued decisions on the CTA. A Missouri federal court invalidated it, but limited the effect to the plaintiffs in that case. A Virginia federal court upheld it, explicitly declining to follow the Missouri court. The Texas court agreed with the Missouri court, and extended the injunction nationwide.

Differences between federal courts are resolved by higher courts (“circuits”) that govern their districts. The Virginia, Missouri and Texas courts are all in different circuits, so assuming that one or more of their decisions are appealed and upheld by their respective circuits, the case ultimately will come to the Supreme Court to resolve. We cannot predict whether the Supreme Court will consider an appeal on an emergency basis. Many businesses have already complied with the CTA requirements and doubtless would like their information to be destroyed if the Act is invalidated.

We will keep everyone advised as the case proceeds.